Question

At 12/31/17, the end of Jenner Company's first year of business, inventory was $4,100 and $2,800 at cost and at market, respectively.

Following is data relative to the 12/31/18 inventory of Jenner:

Original Appropriate

Cost Selling Disposal Inventory

Item Per Unit Price Cost NRV Value

A $ .65 $ 1.00

B .45 1.00

C .70 1.00

D .75 1.00

E .90 1.00

Selling price is $1.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 30% of selling price. There are 1,000 units of each item in the 12/31/18 inventory.

Instructions

(a) Prepare the entry at 12/31/17 necessary to implement the lower-of-cost-or-market procedure assuming Jenner uses a contra account for its balance sheet.

(b) Complete the last three columns in the 12/31/18 schedule above based upon the lower-of-cost-or-NRV rules.

(c) Prepare the entry(ies) necessary at 12/31/18 based on the data above.

Answer 1

a. Loss due to reduction in the market price of materials Dr $1300

Allowance to reduce inventory to market. Cr. $1300

( since the company uses a contra account, the loss will be charged to income statement and the allowance account will be reduced from the inventory, in the financial position statement)

(The loss for the year = market price - cost of goods = 4100 - 2800= 1300)

b. For the year, 12/31/18

Products	Sales Price	Sales Price - disposal cost(1-.01)*	NRV = Sales Price - disposal cost-profit (1-.1-.3)**	Cost	Lower of NRV or Cost	Cost of inventory based on lower of NRV or Cost	Cost of inventory based on cost
A	1	0.9	0.6	0.65	0.6	600	650
B	1	0.9	0.6	0.45	0.45	450	450
C	1	0.9	0.6	0.7	0.6	600	700
D	1	0.9	0.6	0.75	0.6	600	750
E	1	0.9	0.6	0.90	0.6	600	900.00
Total					0	2850	3450

*The disposal cost is 10% of sales price which is equal to 10% of $1 = 0.10$

** The normal profit is 30 % of sales price which is equal to 30% of $1 = 0.30$

c.

Allowance to reduce inventory to market. Dr $1300

Cost of Goods sold     Cr. $1300

(Being the reversal of the reduction in inventory during the previous year based on the valuation of lower of cost or NRV.)

Loss due to reduction in the market price of materials Dr $600

Allowance to reduce inventory to market. Cr. $600

(Being the loss recognized due to valuation of inventory based on the lower of NRV or cost) ( the loss = NRV - cost = 3450 - 2850 = 600$, refer to the table above for the item wise calculations)